Ukraine between FTZ and EU
When the Ukrainian parliamentary election campaign started, the Ukrainian parliament ratified the agreement on a free trade zone within the CIS. The agreement was signed on 18 October last year. Thus, Ukraine has become the third country (after Russia and Belarus) which has ratified the agreement. The establishment of the free trade zone within the CIS has become a fait accompli. The only thing which is still necessary is handing over the instruments of ratification to the CIS Executive Committee by the three countries. Experts discuss the benefit from this agreement for the member countries, the deepening of integration processes in the post-Soviet space, as well as the trade and economic cooperation between Russia and Ukraine.
Oleg Ustenko, Executive Director of the International Blazer Institute, economist
In Ukraine, there have been a lot of debates because of the contradictions between Russia and Ukraine, primarily related to the fact that Russia is not a WTO member. It seems that this contradiction has already been removed: in August, Russia becomes a full member of WTO, and automatically some of the contradictions discussed in Ukraine, in terms of integration with the Russian economy, seem to have been removed. It is expected, by the way, that the economic effect of the entry of the Russian Federation to the WTO will be quite large - there are different evaluations of this measure, from 50 billion to 180 billion dollars per year from the date of accession to the WTO. That is, we are talking about from 3 to 7 or 8 percent of the GDP of the Russian Federation, which is a serious effect. Ukraine will get some benefit associated with this step, i. e. the accession of Russia to the WTO, and, again, the removal of the existing contradictions. Import tariffs will decrease sharply. If the average tariff for the Russian Federation is now about 10 percent, after entry to the WTO it will be reduced to 7.5 to 7.8 percent. This also removes the barriers in our total trade. It seems that the Russian Federation will also derive tangible benefits which Ukraine is trying to use. The possible share of foreign participation in telecommunications and banking will be reduced, which is relevant for the Ukrainian business. Obviously, the Russian Federation will be able to receive additional benefits associated with the increase in foreign direct investment in the country, and Ukraine does not want to be away from this process. In the past year an amount of about $300 billion has been invested in emerging markets, of which Ukraine has received around $6 billion. This amount is clearly insufficient for a country like Ukraine. Ukraine sees an opportunity to attract additional foreign direct investment due to this kind of cooperation with Russia. So there’s some sort of a pragmatic goal here. It seems that it is an absolutely logical step. Moreover, the inflow of direct foreign investment in the Russian Federation would mean, first of all, a change in the industrial base of the country, and Ukraine is a major seller of engineering products to Russia. Last year we sold machine-building products valued at $7 billion to Russia; this is 36 percent of our exports to Russia. Obviously, Ukrainian business could not afford to miss any opportunity to sell its products to Russia. This was an additional argument to continue to lobby for the signing and ratification of such an agreement with the Russian Federation. It must be said that there are great expectations for the new opportunities for Ukrainian steelmakers and producers of agricultural products, which are 10 per cent of Ukrainian exports to Russia, and I understand that there is a strong lobby on the part of agricultural producers. Moreover, it is expected that, after Russia’s accession to the WTO, some of the barriers that exist in the sphere of trade in agricultural products are to be removed, and the amount of $9 billion, which the Russian Federation declares as possible subsidization of agriculture in 2012, will be gradually reduced to $4.5 to $4.8 billion. It will make the position of the Ukrainian agricultural producers and food industry workers in the Russian market stronger till 2018. Increased competition for energy resources is also possible, and there are great expectations on the part of Ukraine connected with the fact that the progress that will be achieved in the Russian Federation in this area will provide an opportunity to get some additional benefits and preferences for Ukraine, although it is still questionable. Do not forget that the Ukrainian economy is export-oriented, and half of the GDP of Ukraine consists of the exports of goods, and 30 percent of Ukrainian exports go to the Russian Federation. Moreover, the share of the Russian Federation in Ukrainian exports has increased over the last few years, from 25 percent three years ago to the current 30 percent, while the share of the European Union decreased slightly (but even now 25 percent of Ukrainian exports go to the European Union). This geographical structure of Ukrainian exports makes the Ukrainian side to try to play on several fronts, and obviously, the Russian Federation is an important destination, but the European Union remains the second most important destination for Ukraine.
Alexander Shirov, head of the laboratory of analysis and forecasting of manufacturing capacity and inter-sectoral collaboration of the Institute of Economic Forecasting of the RAS
I do not believe that this agreement has a significant impact on trade and economic relations between Russia and Ukraine. I will try to justify this point of view. In this connection, I was amazed at the burning discussion which is going in Ukraine on this issue. Firstly, we must understand that before signing this agreement there were no customs duties on most of commodity items between Russia and Ukraine, as between all the CIS countries, and there was no problem. Secondly, the agreement itself contains a significant number of seizures in the areas which are vitally important both for Russia and for Ukraine; for instance, energy, metallurgy and agriculture. In addition, there is a registered procedure that allows any of the countries which have signed the agreement to introduce tariff barriers if the other side signs agreements disadvantageous to a third country. In fact, these are procedures by means of which Russia will be able to raise tariffs on goods imported from Ukraine, if, say, Ukraine signs an agreement on free trade zone with the EU. Hypothetically, such a threat exists. In fact, this agreement contains a large number of provisos, which, in our opinion, severely limit its potential impact on current and future economic performance. In addition, we must understand that such agreements in the field of customs regulation are primarily of an immediate nature, that is, we cannot expect a lasting effect. Perhaps for the first time some relief of the trade and economic relations will lead to a slight increase in turnover, but in future this effect will gradually decrease. The effect will be very small, of course, it cannot relate to Ukrainian benefits in case of its entry into the Customs Union. These are completely different levels of integration, with different effects, and this fact must be realized.
Vyacheslav Yevseyev, Director of the Center for the Study of Tariff and Non-tariff Regulation
In economic terms, in my opinion, the ratification of the agreement on free trade zone will not influence the trade relations between Russia and Ukraine. An indirect indication of this conclusion is that the stock markets in Russia and Ukraine reacted rather calmly to the ratification yesterday. If you look at the indices, you will not see any significant change, either in Russia or in Ukraine. This shows that the agreement will not immediately and seriously influence the trade relations between Russia and Kiev. Nevertheless, the agreement should be considered to be a political signal to the business community in both countries, saying that Russia and Ukraine are ready to meet each other and solve the problems in their trade relations that exist. Nevertheless, a number of Ukrainian colleagues have expressed the opinion that this mechanism creates some additional opportunities for reducing the discrimination of the Ukrainian producers concerning their access to the Russian market. In fact, this is not true. In fact, the guarantees of reducing discrimination of the Ukrainian manufacturers in the market of the Customs Union, in the CIS, in the Russian market are primarily created by Russia’s accession to the WTO. Those mechanisms and the obligations assumed by Russia both to reduce tariffs and to restrict the use of discriminatory sanitary and technical barriers, the tools for the settlement of trade disputes, which include the agreement on free trade zone, provide several tools of trade to the members of the FTA. This is the CIS Economic Court, to which Ukraine does not have any access; this is the sort of expert committee (the role of such expert committees in settling trade disputes between the countries of the CIS is, in my opinion, questionable); the third mechanism is the trade dispute settlement body of the WTO for those countries which are WTO members. This tool is something that can really help Ukraine resolve trade conflicts with the Russian Federation, but this is not the subject of the agreement on free trade zone of the CIS. Ukraine could use this tool, as it is not a member of the FTA. However, once again, it’s a pretty good political signal for companies from both countries which move in the same direction. Moreover, we know that Ukraine has been actively engaged in two parallel process of creating free trade areas in recent years, both with Russia and the CIS and with the European Union. However, the commitments of Ukraine to establish an FTA with the countries of the CIS do not limit the ability of Ukraine to enter into such agreements with third countries. This is clearly spelled out in this agreement, and there is such an opportunity in all the commitments of Russia and Ukraine concerning the WTO. Moreover, as far as I know, President Yanukovych has recently announced that signing the agreement on free trade zone with the European Union is also an important priority for Ukraine, and such an agreement will be signed sooner or later. But the agreement with the European Union substantially differs from the agreement with the CIS countries. It contains many more aspects. While the agreement with Russia only establishes zero tariffs, the agreement with the European Union stipulates the issues of trade in goods, trade in services, intellectual property, investment, and one of the most important aspects is that Ukraine will take on the obligations to harmonize its standards with the standards of the European Union. In fact, it turns out that Ukraine is building a very interesting system, in which it will become a kind of bridge, if it ratifies the agreement with the EU. It will be a kind of bridge by means of which it will be able to trade duty free with both the members of CIS and the European Union. Thus, by attracting investments, getting modern technology and modern standards of a free trade zone with the EU, and access to the market of the CIS countries, Ukraine can build for itself a very interesting economic system in which it becomes a kind of bridge in trade relations and in rapprochement between the CIS countries and the EU countries. Concerning protective measures and discrimination, this agreement does not solve the problem, let’s say, of the Ukrainian pipe producers and steelmakers, because the protections which are currently in use by Russia are anti-dumping duties and special safeguard duties. They are governed by the WTO rules and the agreement on free trade zone of the CIS clearly says that it is possible to use anti-dumping measures and special safeguard measures, and that in case of a dispute they will be considered according to the WTO procedures. Thus, if such an agreement had been ratified, say, before Russia joined the WTO, it would be much more interesting for Ukraine. But Russia’s accession to WTO neutralizes the value of these protective mechanisms of the agreement.